Remarks by Raymond V. Gilmartin
"Meeting the Challenge of Pharmaceutical Innovation
in an Environment of Rising R&D Costs"
Tufts Center for the Study of Drug Development
November 30, 2001

Good afternoon. It's a privilege to be here with you to offer Merck's perspective on the drug discovery process and to discuss the implications of Dr. DiMasi's study. As the nation's attention turns increasingly to issues surrounding the use and costs of medicines, we should congratulate Dr. DiMasi and the Tufts Center for its work on this study, and for the center's contributions over the past 25 years to the public debate on pharmaceutical issues.

The study updates one of the most discussed numbers in the pharmaceutical debate - the cost of developing a new medicine. Dr. DiMasi and his team estimate that the cost of developing a new drug is now more than $800 million. In inflation-adjusted terms, this estimate represents a 250 percent increase in just over a decade.

Today, I would like to make some observations about what that number means to patients, to Merck and to those who make pharmaceutical policy. And, without taking anything away from the importance of this research, I will make some comments on what I think this number does not mean.

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To begin, I see three principal lessons that can be drawn from the new Tufts estimate.

First - the $800 million cited by Dr. DiMasi is important confirmatory evidence of an increasingly complex nature of developing an innovative new medicine today;

Second - the absolute size of this estimate suggests that a large and vibrant pharmaceutical industry is necessary to turn a new generation of research advances into important new medicines; and

Third - the essential and intertwined roles of profit and intellectual property protection are all the more important as incentives for continued pharmaceutical innovation.

I will briefly review each of these in turn.

The steep increase in research costs cited by Dr. DiMasi is consistent with the growing complexity and expense of the work we do in the pharmaceutical industry. Increasingly, each new drug requires more study. Clinical trials are larger and more complex. The number of patients in a new drug trial has increased from about 1,300 in the early 1980s to more than 4,000 for a typical new medicine today. And, in an indication of the growing complexity of what we are trying to measure, the number of medical procedures per patient in trials, such as blood tests and other measurements, is also going up, from about 100 in the early 1990s to more than 140 today.

Research costs are increasing not only because of the number of patients and the number of procedures required per trial, but, in many cases, the drug discovery process now demands investment in costly new diagnostic technologies. Investment in these diagnostic technologies sometimes helps to change the practice of medicine, and thus confers important benefits to physicians and patients that long outlive a clinical trial.

For example, when Merck began development of its osteoporosis therapy, FOSAMAX, we also needed to invest in bone density testing equipment to measure the effectiveness of the medicine. Bone density testing has now become part of the standard of care for women at risk of this disease.

Likewise, when Merck began studies with its protease inhibitor, CRIXIVAN for HIV/AIDS, testing for viral RNA was not part of the standard of care. Our trials helped health-care professionals around the world to use these measurements to determine the amount of virus in the blood - and thus had a lasting impact long after the trials were completed and CRIXIVAN was approved.

As a second observation, the sheer magnitude of the new Tufts estimate suggests that the institution of a large, global pharmaceutical company remains a necessity if patients are to gain the medicines they need. Smaller, specialized biotechnology and genomics companies have a key role to play - often as research partners of larger pharmaceutical companies. However, the major medicines that are the everyday staples of medical practice have and will continue to come through the development process by companies such as Merck that can bring together vast resources on a continuing basis. These same companies are the ones that are large enough to tolerate the failure that is inherent in pharmaceutical research and that are accounted for in the Tufts estimate.

While the story of Merck research is filled with success, it also contains its share of frustration. Our cholesterol medicine, MEVACOR, was the first of the revolutionary class of statin medicines when it was launched in the 1980s. Yet MEVACOR was almost abandoned in the labs because of the particularly difficult challenges our scientists faced in completing clinical trials. Today we know that the perseverance was well worth the effort. MEVACOR paved the way for the statin medicines that have been universally accepted as a breakthrough in lowering cholesterol and helping to fight heart disease.

And intense competition based on price and benefits is the hallmark of this class of medicines as several competitive medicines entered the class to follow MEVACOR. In the near future, generic statins will enter the market to reduce the price of this therapy even further.

The third point I would make about the meaning of the new Tufts estimate is that it should remind us of the essential and intertwined roles of profit and intellectual property protection in pharmaceutical innovation. No pharmaceutical company could consider making an up front- investment of an average of $800 million dollars without adequate protection of the inventions that underlie each new drug discovery. It is that protection that allows us to have the exclusive right to market our specific molecule for a period of time - usually 12 to 14 years - without the threat of competition from those who would seek to sell the same medicine without having made the investment and assumed the risks in its discovery.

Of course, it is important to note that a patent is not a monopoly. Our patent protection does not deter industry competitors from selling similar medicines - close substitutes - often only months after initial approval of the first in a new class. But patent protection gives a pharmaceutical company the ability to market a medical innovation with the promise of potential profit and motivates individuals and institutions to invest in pharmaceutical companies rather than in some other investment. A free market that rewards innovation provides the fuel for further investment in pharmaceutical research and development and even greater opportunities to advance the state of medical care.

For our part, Merck is comfortable competing in this environment. We've built our growth strategy around turning cutting-edge science into breakthrough medicines. And our track record is one of success - 17 new medicines since 1995 - more in that time than in any comparable period in our history.

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These are some of the lessons we can take away from the estimate that the average cost of a new medicine is $800 million dollars:

Yet, there are some things that $800 million cannot and does not explain.

First, we should not take away the message that these rising research costs are translating into higher pharmaceutical prices. For example, while research costs rose by an average 10 percent on an annual basis since 1987, the producer price index for pharmaceuticals rose by only half that rate - or by just 4.9 percent.

That should not surprise anyone. The price of medicines isn't determined by their research costs. Instead, it is determined by their value in preventing and treating disease. Whether Merck spends $500 million or $1 billion developing a medicine, it is the doctor, the patient and those paying for our medicines who will determine its true value. Those medicines that deliver the best value - in terms of true medical advances - will command prices commensurate with that value. Those medicines that represent marginal or no improvement over existing therapies will gain little respect in an increasingly demanding marketplace

The proof of this comes in part from the influential research by professors Henry Grabowski and John Vernon at Duke University that showed, based on the earlier Tufts' estimates, that just three in ten medicines earned the average research cost. We eagerly await their update of that study but fully expect that the results will change little.

The second lesson that we should not take away from the new study is that companies should accept the rising cost of drug development as a given. Research-based organizations like ours must become more efficient and focused in order to master the challenges of the rising costs identified in Dr. DiMasi's study. Increasingly, the efficiency of a company's research efforts will become a distinct competitive advantage.

Merck has always been among the best in the industry at turning cutting-edge science into breakthrough medicines. And we have always been among the best at moving medicines from clinical trials through the approval process. But we still see ourselves in a mode of continuous improvement - because we have a clear idea about what we're trying to accomplish, and there's still much more we can do.

Today, we believe that the genomics era will help to bring us to the next level - to enable us to design and develop medicines more precisely, with greater safety and with less risk of failure. New tools such as combinatorial chemistry, high-throughput screening, and gene chip technology have and will continue to profoundly change the way research is done. The ability of organizations to adapt to this change will - over the next five to 10 years - determine the companies that will succeed in this new environment, as well as those that will fail.

One technology that our scientists are very excited about involves the use of what we call DNA or gene chips. Each of these small chips allows us to monitor the expression of over 10,000 genes, in order to examine the behavior of cells or tissues in health and disease. By using pattern recognition methods and computer algorithms, our scientists can analyze the patterns of gene expression in ways that were not possible in the pre-genomics era, when gene expression was examined serially, one gene at a time.

This kind of parallel processing is transforming biology and drug discovery, by providing accelerated insights into both the safety and efficacy of potential drug candidates, a process that currently takes a long time and a lot of costly studies. We're developing genomics methods to predict which molecules have undesirable side effects so we can discard them early in the research process, and focus on improving success for the ones we elect to take forward. This technology will also allow us to do better, faster, more efficient clinical trials, by providing access to patterns of genetic markers that are predictive of an outcome in the clinic.

As a result of the explosion of new information and technology, there are many strategies at play within our industry. It will be very interesting to see who is right - for the right strategies will determine our relative rankings within the industry five to ten years out.

The third and final lesson is that, while drug research requires a large and sustained investment, the quantity alone of research spending does not determine success. It is the quality of that spending that matters most. Scale is important but science is even more important. For once you have achieved a certain size, it is scientific talent that enables a company like Merck to do what it does best - and that is to turn cutting-edge science into breakthrough medicines.

I make this statement not only because of our Company's track record, but because we realize that to continue to be successful in an era of intense scrutiny over the price and cost of medicines, we must distinguish ourselves based on the quality of products our science delivers.

In today's highly competitive marketplace, sophisticated purchasers are increasingly driving tough bargains. They are demanding that the price of a medicine more accurately relate to its benefits. And they should be doing this. The pharmaceutical industry is now a decade removed from the days when we could drive our growth through price increases. Today, we grow by introducing medicines that represent true advances for patients and whose value is seen clearly by those who pay for medicines.

At Merck we are making changes to insure that we stay on the cutting edge science and, consequently, the quality of what we deliver to the patient.

One example is our new philosophy about licensing and business development. Beyond a traditional way of working with outside firms, we now think of this function in terms of managing external research - providing a continuum between what's done externally with start-up companies and research universities and what we do internally in basic research. Along these lines, we recognize that when we see promising new science or technology being developed outside our Company, we look for ways to bring it inside.

With that in mind, Merck recently bought a company called Rosetta Inpharmatics, a leading company in gene expression analysis. This acquisition will give Merck access to cutting-edge genomics technology - as well as access to the talents of scientists for whom genomics is second nature.

Our research process is also changing as we branch out from our traditional research enclaves in Pennsylvania and New Jersey. We are placing our new research facilities in the midst of research universities and in clusters of innovation where new scientific knowledge is being incubated. We acquired a neurosciences company called SIBIA in La Jolla, California, to be close to the University of California in San Diego where advanced work in neuroscience is being done. Had we not been able to make that acquisition we would have built a lab there. And we're building a research facility in Boston to take advantage of the cutting-edge science being done at MIT and Harvard.

And we are improving our science by bringing new research leadership into the Company - leaders for whom genomics is second nature - like Peter Kim from MIT, Dennis Choi from Washington University and Stephen Friend from Rosetta.

We're betting that because of Merck's culture - of always wanting to be on the cutting edge of science - we can make the transformation that's required to conduct research in a totally different way. The transformation we're undertaking right now is crucial for us to be able to stay on the leading edge of science for the next 10 to 20 years. And staying on the leading edge of science will mean that Merck can continue to deliver medicines of quality and value.

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In summary, then, I believe these are critical caveats to Dr. DiMasi's research:

First - patients and physicians judge new medicines by their benefits; not their research costs. Only new medicines that deliver value will be rewarded in the marketplace and justify the investment in their creation.

Second - even though costs are rising, new technologies and insights should give the best research organizations the tools they need to operate more efficiently; and

Third - the size and scale of a company's research investment are important but not the only things that matter. The quality of a company's research investment - the ability to target the most important scientific insights and turn them into important new medicines - is what will ultimately determine success in our industry going forward.

Thanks once again to Dr. DiMasi and the Tufts Center for 25 years of important research. It is more important than ever that we have sound research that paints a clear, balanced, view of the challenges we face in bringing a therapy from the scientist's mind into the patient's medicine cabinet. His research has given us new insights into the significant investment of time, energy and capital behind each new medicine.

Thank you for having me here this afternoon to share my perspective on the implications this research has for the future of the pharmaceutical industry.

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